Thursday, August 23, 2012

Still Sticking With Oil

Oil has been moving upwards on a fairly steady basis over the last year or so. All sorts of reasons have been put forth: From a somewhat uneven recovery of the global economy to speculation by bankers, hedge funds, and other various financial entities, including pension and endowment funds, which have “discovered” commodities as an asset class. Providing a backdrop is the seemingly endless dialog about “peak oil”, or, as it might be more correctly named, “peak cheap oil”.

As a fairly long time energy/oil bull, I naturally try to pay close attention to this area. Not just to companies that I may hold, but the oil/gas sector, generally speaking. I recently ran across a couple of articles that would suggest that oil will continue to get more expensive before it gets notably cheaper.

The first piece ran back on April 16 in the Calgary Herald and was picked up by Reuters as well. It seems that auditors in Mexico are urging Pemex to slash reserve estimates at one of its largest flagship projects, the onshore Chicontepec project. It was hoped that the project would compensate for the radically declining production from the offshore Cantrell field.

The auditors want estimates of reserves cut by over 7.5 Billion boe. This is a more than 17% cut of the 43 Billion boe of proved, probable, and possible reserves. Evidently, this project has repeatedly failed to meet production projects. At the end of 2009, Chicontepec was only pumping just over 29k bbl/day, which is less than half of what had been projected at the start of the year. Pemex has scaled by this year’s target to 48k bpd, from an original 176k bpd.

Perhaps readers will recall a similar situation a few years back, when Royal Dutch Shell (RDS.A) was forced to admit that its reserves had been vastly overstated.

This would give credence to those who are suggesting that Mexico will become a net importer of oil as soon as 2015, rather than an exporter (and one of the largest suppliers to the U.S.).

The second piece was from Australia’s Courier Mail, and also appeared on April 16. Interestingly enough, it covered the results of a report by the U.S. Joint Forces Command, which is also predicting an oil supply crunch, but as a result of conditions not typically put forth in the peak oil debate.

Rather than a negative imbalance between supply and demand, based on reserves, this report sees a possibility of an oil shortage as early as 2012, because of a lack of production capability, meaning drilling platforms, engineers, and refining capacity.

To quote from the article:

More ominously, the military predicts a "Peak Oil" scenario - where demand outstrips the world's supply capacity - as soon as 2012.

"By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels a day."

All in all, I can’t quite seem to convince myself to take my oil-related profits off of the table, at least for now.

Sources: The Calgary Herald
The Courier Mail

Disclosure: Long: Provident Energy Trust (PVX), Statoil (STO), Magellan Midstream Partners (MMP), Kinder Morgan Management (KMR)

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